1.What are the available ways for foreign-invested enterprises (“FIE”or “FIEs”) to deregister?
Under PRC laws, a company may terminate operations and deregister in the following circumstances:
(1)Voluntary Dissolution. Voluntary dissolution is a company’s dissolution based on the decision of its shareholders, generally including: the expiration of the business term as specified in the company’s articles of association (“AOA“), or the occurrence of other dissolution events stipulated in the AOA, together with a shareholders’ resolution for dissolution or dissolution necessitated by a company merger or division.
(2)Involuntary Dissolution. An involuntary dissolution is usually divided into an administrative-ordered dissolution and a court-ordered dissolution. An administrative-ordered dissolution covers cases where a company’s business license is revoked, or a company is ordered to shut down or revoked in accordance with the law. A court-ordered dissolution applies where a company encounters severe difficulties in its operation and management so that its continued existence will cause substantial loss to the shareholders’ interests, and this cannot be resolved through alternative means. Shareholders who hold 10% or more of the voting rights of the company may request the people’s court to dissolve the company.
(3)Bankruptcy Declaration. A company can be declared bankrupt in accordance with the PRC Enterprise Bankruptcy Law and other applicable laws. Where a company is unable to repay its debts, and its assets are insufficient to cover all liabilities or it is obviously incapable of paying its debts, the people’s court may declare the company bankrupt upon verification of such evidence and the company’s failure of reaching a settlement or completing reorganization proceedings.
Voluntary dissolution via a shareholders’ resolution is the most common way for the deregistration of an FIE. As such, this article will focus on the deregistration of FIEs through voluntary dissolution.
2.What are the differences between an ordinary deregistration and a simplified deregistration?
In the case of a voluntary dissolution via a shareholders’ resolution, FIEs can apply for deregistration in two ways: ordinary deregistration or simplified deregistration. The core difference between them (in terms of company deregistration with the “AMR“) is detailed below:
Items
Ordinary Deregistration
Simplified Deregistration
Applicable Scope
Applicable to all FIEs without any restrictions.
Where a company has incurred no creditor’s rights or liabilities during its existence, or has fully settled all such creditor’s rights and liabilities, and has no outstanding liquidation expenses, employee wages, social insurance contributions, statutory compensation or payable taxes (including late payment surcharges and fines), it may complete deregistration via the simplified procedure, provided that all investors (shareholders) execute a written undertaking (“Undertaking Letter“) to bear legal liability for the truthfulness of the aforesaid statements.
Liquidation Requirements
Form a liquidation team and publish a list of the liquidation team members and the person-in-charge of the liquidation team via the National Enterprise Credit Information Publicity System (“Liquidation Team Filing“).
The formation of a liquidation team and a Liquidation Team Filing are not required.
Disclosure Requirements
A creditor’s announcement may be published either via the National Enterprise Credit Information Publicity System or in newspapers in accordance with the law, with an announcement period of 45 days.
Publish a simplified deregistration announcement via the National Enterprise Credit Information Publicity System, with an announcement period of 20 days.
Documents Required for Company Deregistration with AMR
Upon the expiration of the announcement period, the liquidation team shall submit documents including the deregistration application form, the dissolution resolution or decision, the liquidation report and the tax clearance certificate to the company registration authority to apply for deregistration.
Upon the expiration of the announcement period, the company may file an application for simplified deregistration with the company registration authority within 20 days from the date of expiration of such announcement period. The documents to be submitted include the deregistration application form and the Undertaking Letter.
Liabilities of Shareholders
Liability may arise under specific circumstances as set out below:
(1) where a party maliciously disposes of a company’s assets and thereby causes losses to creditors, or obtains deregistration of the legal person from the company registration authority by submitting a false liquidation report without conducting liquidation in accordance with the law, such party shall bear the corresponding compensation liability for the company’s debts; or
(2) where the company completes deregistration without undergoing liquidation procedures, the liable persons shall be responsible for repaying all debts of the company.
The shareholders shall sign the Undertaking Letter to warrant that the company had no outstanding liabilities during its existence or has fully settled all liabilities. If any representation under such undertaking is untrue, the shareholders shall be jointly and severally liable for all liabilities incurred prior to the deregistration.
The Timeframe for Company Deregistration with AMR
Around 1.5-2 months in normal cases.
Around 1 month in normal cases.
3.What are the complete ordinary deregistration procedures for an FIE?
Including the timeline for the employees’ termination, the settlement of claims and liabilities, and the completion of various deregistration filings, the whole deregistration procedure generally takes at least six months. The process will be further prolonged if the company has historical legacy issues or non-compliance matters. The detailed procedures for ordinary deregistration are set forth below:
(1)Company Liquidation. Prior to commencing liquidation, the company’s governing body (i.e., the shareholders’ meeting) shall issue a resolution to dissolve the company. A liquidation team shall be formed within 15 days after the issuance of such resolution to take charge of sorting out the company’s assets, claims and liabilities. Within 10 days from the formation of the liquidation team, the Liquidation Team Filing shall be completed. Within 60 days, a creditors’ announcement shall be published via the National Enterprise Credit Information Publicity System or newspapers in accordance with the law, with a mandatory announcement period of 45 days. The liquidation team shall carry out liquidation work, settle all claims and liabilities, distribute residual assets and prepare a liquidation report.
(2)Completion of Various Deregistration Filings. After completing the liquidation, the company shall file applications with the competent local authorities for tax deregistration, company deregistration, social insurance deregistration, foreign exchange FDI deregistration, the remittance of residual assets to overseas shareholders and the closure of company bank accounts. If a company is registered as a customs declaration entity, it shall also complete the deregistration of the record-filing of a customs declaration entity.
4.What are the complete simplified deregistration procedures for an FIE?
Compared with ordinary deregistration, the procedures for simplified deregistration are more streamlined. Companies eligible for simplified deregistration are exempted from the Liquidation Team Filing and the publication of a creditors’ announcement. After completing company liquidation, a company may sequentially submit applications to the competent local authorities for tax deregistration, company deregistration, social insurance deregistration, foreign exchange FDI deregistration, the remittance of residual assets to overseas shareholders and the closure of company bank accounts. If a company is registered as a customs declaration entity, it shall also complete the deregistration of the record-filing of a customs declaration entity. In terms of timelines, simplified deregistration takes far less time than ordinary deregistration. In practice, the overall duration of simplified deregistration can be reduced by at least three months, compared with ordinary deregistration.
5.What to do if the FIE to be deregistered has subsidiaries or branches?
Where an FIE holds subsidiaries or operates branches, such branches and subsidiaries must complete their respective deregistration procedures before the parent company submits its deregistration application to the AMR. The AMR generally declines to accept deregistration applications filed by a company that still maintains existing branches or subsidiaries. Accordingly, if a company proposed for deregistration owns branches or subsidiaries, it is advisable that shareholders make plans for the winding-up of the FIE’s branches and subsidiaries in advance to prevent delays to the overall deregistration process of the company.
6.How to handle the creditor’s rights and debts of an FIE to be deregistered?
Under PRC law, if a company proposed for deregistration still has unsettled claims and liabilities, it shall not be eligible for simplified deregistration and must conduct liquidation via the ordinary deregistration procedures. The liquidation team shall be responsible for sorting out the company’s assets, preparing a balance sheet and a detailed inventory of assets, and formulating a liquidation plan.
After a company’s assets are used to pay liquidation expenses, employee wages, social insurance contributions and statutory compensation, settle outstanding taxes and repay all corporate debts in such order, any remaining assets shall be distributed so that, in the case of a limited liability company, they are in proportion to the capital contributions of its shareholders, or in the case of a joint stock company, in proportion to the number of shares held by its shareholders.
7.How to handle the employees of an FIE to be deregistered?
Under PRC law, where an employer is dissolved, its labor contracts with employees shall terminate accordingly, and the employer shall pay economic compensation to the employees.
In practice, to avoid potential issues during company liquidation, the company usually issues a dissolution resolution to legally end their employees’ labor contracts and make proper arrangements for staff accordingly.
It is worth noting that company liquidation is often time-consuming and complicated. The company may need employees who are familiar with its operations, especially its finances, assets, contracts, liabilities and other matters (“Retained Employees“) to assist with the subsequent liquidation and deregistration work. Nevertheless, once the company resolves to dissolve, the labor contracts of ordinary employees shall also terminate, and ordinary employees have no statutory obligation to assist the company with any follow-up liquidation and deregistration procedures. Accordingly, it is advisable that the company enters into a mutual termination agreement separately with Retained Employees, which specifies the exact termination date of the labor contract and sets out the terms governing any follow-up assistance services.
8.How to legally form a liquidation team? What liabilities need to be borne by liquidation team members?
Under PRC law, the directors of a company shall be the liquidation obligors, and the liquidation team shall be composed of such directors, unless otherwise stipulated in the AOA or the shareholders’ resolution appoints other persons.
In practice, when appointing members to a liquidation team, companies may consider their size and the workload involved in the liquidation work. The goal is to ensure a smooth and efficient winding-up process while keeping liquidation costs down. Current PRC laws do not impose any mandatory restriction on the number of liquidation team members. Based on our experience, the most common number is 3-5 members. Liquidation team members shall perform their liquidation duties with their duty of loyalty and their duty of care. Where a liquidation team member fails to diligently perform their liquidation duties and thereby causes losses to the company or its creditors, such member shall be liable for indemnification.
9.How to legally remit overseas shareholders’ residual assets and liquidation proceeds out of the PRC after the completion of liquidation of an FIE?
Liquidation income lawfully obtained by foreign investors within the territory of the PRC may be freely remitted out of the PRC in RMB or foreign exchange in accordance with the law and shall not be subject to unlawful restrictions. Nevertheless, the free outward remittance of such funds is conditional upon full tax settlement and the completion of all foreign exchange compliance formalities.
Prior to a company’s distribution of residual liquidation assets, currency conversion and remittance to overseas shareholders, the company, as the paying party, is obligated to withhold and pay the withholding income tax. Tax shall only be levied on the taxable gains in the liquidation distribution that exceed the foreign shareholder’s original investment costs, including the dividend income and the portion of residual assets in excess of the shareholder’s original investment costs, after deducting dividend income. The standard tax rate is 10%. If the jurisdiction where the overseas shareholder is a resident has signed a bilateral tax treaty with the PRC, a company may apply to the competent tax authority for the preferential tax rate stipulated under the treaty. After completing a full tax settlement, a company may process the outward remittance of the overseas shareholder’s liquidation proceeds through banks qualified to conduct foreign exchange businesses.
10.What services can external legal counsel provide?
With respect to company deregistration and liquidation matters, experienced external legal counsel may assist clients in coordinating and advancing the entire liquidation and deregistration workflow, controlling key project milestones and delivering the following legal services:
- assist in conducting liquidation-focused legal due diligence, sorting out assets, liabilities, claims and obligations, as well as potential legal risks (such as liability for breach of contract arising from the termination of upstream and downstream commercial agreements);
- support the drafting and review of liquidation plans, and participate in the negotiation, preparation and execution of all liquidation-related legal documents; and
- facilitate various formalities including the Liquidation Team Filing, the creditors’ announcement, the public announcement for simplified deregistration, full tax settlement, company deregistration with AMR and other deregistration formalities, to ensure the legality and compliance of all liquidation and deregistration procedures.
JunHe has extensive experience in providing legal services for corporate liquidation and deregistration. Should you need further details, please email China_Business_Support@junhe.com to request a quotation and references.
For further information, please contact:
CAO, Xiang (Shawn), Partner, JunHe
caoxiang@junhe.com
